Greek Default Redux

If we told you last January 1 that Greece would default twice in 2012, what would you do?

With that foreknowledge, abandoning stocks would look sorely tempting. Defaults are bad! Why not just sit the year out and buy back in once things looked normal?

Here’s why: As our boss, Ken Fisher, wrote in Interactive Investor in January, when investors expect disaster, “anything better will be an upside surprise. The less disaster-like, the bigger the surprise.”

And Greece’s dual defaults were decidedly undisaster-like. The first, in February, was the largest sovereign default in history, but also one of the most orderly. Greece’s private-sector creditors took a 53.5% haircut on the face value of their Greek debt holdings, allowing Greece to write off €100 billion of its debt load. Because Greece used retroactive collective action clauses to force all holders of debt governed by Greek law to participate, the ISDA ruled the writedown constituted a credit event, triggering $2.5 billion in dreaded CDS payouts. But because the process was well-planned and detailed long in advance, markets barely shrugged. Armageddon didn’t ensue.

This week, Greece technically defaulted again, asking many of those same private-sector creditors to take another 60-70% loss. This time, the haircut comes via a voluntary debt buyback—Greece will repurchase about €20 billion of its outstanding debt, tendering new ESM-backed debt in exchange. And once again, stocks aren’t tanking. Nor do they have much reason to—the Dutch auction, which wraps today, appears fully subscribed, with banks and hedge funds attracted by the better-than-expected terms Greece offered. Only two weeks ago, with EU and IMF leadership in a stalemate over Greek aid disbursement, outright chaos seemed possible—a successful buyback, even one that involves another €20 billion in private sector losses, is far, far less disastrous.

That’s been the theme of 2012 in the eurozone. When it comes to Europe, global markets fear one thing most of all: The currency’s disorderly collapse. Simple confidence this won’t happen—that reality will exceed expectations and fears—has been enough to make markets breathe a sigh of relief. That’s true of Greece’s default, Spain’s regional bailouts, Spain’s bank bailout, Italy’s political uncertainty, Spain and Portugal’s deepening recessions and what have you. That global stocks could be up nearly 14% year-to-date despite Europe’s seemingly never-ending turmoil speaks to markets’ resilience.*

As Ken Fisher wrote in that same article, waiting for clarity is often a “total mistake.” As long as politicians remain dedicated to supporting the euro—a dedication they’ve demonstrated ever more as the situation progresses—reality should continue exceeding too-dour expectations. Europe’s underlying fundamental economic troubles will be with us for years, as leaders figure out the region’s new political and economic architecture, but markets don’t need an instant fix. Just ok—or even not terrible—progress should be enough to satisfy ever-present euro-jitters.

*Year-to-date MSCI World Index net return as of 12/5.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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